Wednesday, May 22, 2019

Preservation Of Capital Must Remain Job One!

Capital Preservation Must Be Job One!
Again, with so many investors growing more complacent it is a good time to revisit the importance of capital preservation. Today when it appears many investors are falling victim to what is being described as the "fear of missing out"  it is imperative to focus on the long game. Above all other issues it is crucial we remember that capital preservation is job one! Capital preservation goes beyond retaining the same number of dollars, the concept extends to retaining the same amount of buying power and options. The first goal in achieving financial security is to take steps that ensure the capital you have saved is not lost.

Investors and anyone that has worked hard to save and build a nest egg never want to face having to start back at square one or even worse dig their way out from under a pile of debt. It is far easier than you might think to lose your wealth or have it ripped away by crooks. Investing in a scheme that turns sour or a slew of other "bad luck" scenarios can turn your financial world upside-down overnight. Do not expect your governments or banks to have your back if markets and the economy encounter problems. They have moved in the opposite direction instituting laws allowing for "bail-ins" where they can seize depositors accounts when an institution fails and even expanded rules allowing clawbacks.

We live in a world where the value of things are constantly changing and being affected by outside factors. A number of baffling and confusing economic theories that contain loops that are capable of feeding-back upon themselves coupled with a growing number of unexpected pitfalls magnifies the risk of calamity. This means we cannot just bury our money in a hole in the ground and think all will be fine. Obtaining financial knowledge and showing the discipline to take action when necessary are key ingredients in achieving a safer financial future. Also, a little good luck goes a long way in keeping us out of trouble in this dangerous world.

Many of the "modern monetary theories" in use today have not been proven over time but reflect an attitude that we can control economic cycles better than in the past. The basis of the economy we have today is unsustainable and while it has been able to exist for so long does not mean it can continue.  The fact the system muddles through does not guarantee that we will not suffer financial harm as individuals. The policies being put forth by central bankers have massive implications for both investors and society, this is more than a game and it directly affects the lives of people everywhere. The crux of this article is not to present a recipe for achieving a safe financial future but to remind you how important capital preservation is and urge you to elevate it as a priority.

While reading this blog or any article where the writer feels the need to express an opinion, it is wise to remember nobody is right all the time, but they can be wrong all the time. I have had the good fortune of doing far better than most people in building what appears to be a solid base and reasonable future but this is no guarantee of how I will fare going forward. The road ahead often takes twists and bends that we can neither foresee or predict. One thing has become crystal clear over the last few decades and that is the economic landscape is constantly changing this means we really are no safer today than in the past. One day you can be a hero and the next day a goat. 

One of my largest reasons for concern is that I feel the numbers being presented to us do not make rational sense, the "numbers don't work." Newly formed entitlements mean an American born in 1945 can expect nearly $2.2m in lifetime net transfers from the "state" and far more than they pay in. A study by the International Monetary Fund in 2011 compared the tax bills of what citizens pay over their lifetime with the value of the benefits that they are forecast to receive. When you realize if a person toils for forty years earning twenty-five thousand dollars a year they only make one million dollars then the numbers become both frightening and surreal.

A term that I absolutely despise that has come into use by television moderators and the financial media in the last few years is "risk on and risk off day."  The world is not that simple and we should not try to change direction on a whim. As the world has grown more complex and interconnected the financial system has created new risks of contagion and "debt bombs" capable of wreaking destruction are often hidden just out of sight. For a long time, I have been saying "debt does matter" because when debts are erased from one column or entity it is often instantly reflected somewhere else as a drop in net worth. The investment world is becoming an increasingly dangerous place. This leaves all of us vulnerable if the current financial system breaks down and has to be rebooted or restarted under a new or drastically different set of rules.

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